Money, Banking, and Monetary Policy

Question 1

Identify the major components of the United States banking system.

Answer 1

A central banking system, the Federal Reserve System, consisting of:

1. Board of Governors: Policy-making body
2. Federal Open Market Committee: Implements monetary policy through open-market operations to affect the money supply (M1)
3. Federal Reserve Banks: Twelve district banks, each responsible for a specific geographical area of the U.S.

Question 2

Define “monetary policy”

Answer 2

Management of the money supply so as to achieve national economic objectives (e.g., economic growth and price level stability)

Question 3

Identify and define the various measures of money used by the Federal Reserve.

Answer 3

1. M1: Paper and coin currency held outside banks and check-writing deposits
2. M2: Includes M1 items plus savings deposits, money-market deposit, accounts, certificates of deposit (less than $100,000), individual-owned money-market mutual funds, and certain other deposits
3. M3: Includes M2 items plus certificates of deposit ($100,000 and greater), institutional-owned money-market mutual funds; and certain other deposits

Question 4

What are the methods used by the Federal Reserve to regulate the money supply?

Answer 4

1. Reserve-requirement changes (percent of loan amounts that must be held by bank)
2. Open-Market Operations (buying and selling U.S. Treasury debt obligations)
3. Discount Rate (rate of interest banks pay when borrowing from Federal Reserve Banks).

Question 5

What functions does money serve?

Answer 5

1. A medium of exchange
2. A measure of value
3. A store of value